2021 (10) TMI 1051 - AT - Income Tax

Exemption u/s.11 - Charitable activity u/s 2(15) - assessee is a registered entity u/s 25 of The Companies Act, 1956 and holds valid registration u/s 12AA since the year 2005 and hitherto allowed exemption u/s 11 / 12 as applicable to a charitable trust - AO denied the same in this year by holding that the assessee collected maintenance charges, track rent and earned income from other sources which would be in the nature of commercial receipts and therefore, the activities were hit by proviso to Sec. 2(15) - HELD THAT - As in INDIA TRADE PROMOTION ORGANIZATION VERSUS DIRECTOR GENERAL OF INCOME TAX (EXEMPTIONS) OTHERS 2015 (1) TMI 928 - DELHI HIGH COURT if the institution is not driven primarily by a desire or motive to earn profits, but to do charity through the advancement of an object of general public utility, it would be an institution established for charitable purposes. It was also observed that merely because a fee or some other consideration is collected or received by the assessee, it would not lose its character of having been established for a charitable purpose. The dominant activity of the assessee was to be examined. If it was not business, trade or commerce then any such incidental or ancillary activity would also not fall within the categories of business, trade or commerce. Hon ble Allahabad High Court in CIT V/s Lucknow Development Authority 2013 (9) TMI 570 - ALLAHABAD HIGH COURT has held that where a trust is carrying on its activities for the fulfillment of its aims and objectives which are of charitable in nature with no motive to earn profit and in the process, earns some profit, the same would not be hit by proviso to Section 2(15). Thus, it is fairly settled legal position that it is the pre-dominant objective which would be relevant to examine the applicability of proviso to Sec.2(15). The Ld. CIT(A) after examining the primary objects of the assessee as well as the purpose for which it was established, came to a conclusion that the primary objective was charitable in nature and collection of fees was not to earn profit. Therefore, the assessee did not cease to be charitable in character so as to render it ineligible to claim benefits u/s 11 and 12. We concur with these findings of Ld. CIT(A) and consequently, dismiss the revenue s appeals for all the years.

Summary

Issues Involved:
1. Eligibility for exemption under Section 11 of the Income Tax Act.
2. Applicability of amended provisions of Section 2(15) of the Income Tax Act.
3. Nature of receipts (commercial vs. charitable).
4. Interpretation of 'General Public Utility' under Section 2(15).

Detailed Analysis:

1. Eligibility for Exemption under Section 11:
The primary issue revolves around whether the assessee is eligible for exemption under Section 11 of the Income Tax Act. The assessee, a registered entity under Section 25 of the Companies Act, 1956, and holding valid registration under Section 12AA since 2005, was previously allowed exemption under Sections 11 and 12 applicable to a charitable trust. However, the Assessing Officer (AO) denied this exemption for the relevant assessment years, arguing that the assessee's income from maintenance charges, track rent, and other sources constituted commercial receipts. The Commissioner of Income Tax (Appeals) [CIT(A)] later reversed this decision, emphasizing that the assessee was formed as a special purpose vehicle for infrastructure development under a government scheme and that its primary objective was charitable, not profit-driven.

2. Applicability of Amended Provisions of Section 2(15):
The amended provisions of Section 2(15) were a focal point in determining the nature of the assessee's activities. The AO contended that the assessee's activities were hit by the proviso to Section 2(15) due to the commercial nature of the receipts. However, the CIT(A) and the Tribunal noted that the assessee's activities, including the collection of maintenance fees and other charges, were aimed at providing general utility services to industrial units and were not profit-motivated. The Tribunal referenced several judicial precedents, including decisions from the Hon’ble Supreme Court and various High Courts, to support the view that the predominant objective of the assessee was charitable.

3. Nature of Receipts (Commercial vs. Charitable):
The AO classified the assessee's receipts as commercial, thereby denying the exemption under Sections 11 and 12. The CIT(A) and the Tribunal, however, found that the fees collected were to meet the expenditure of providing general utility services such as electricity, roads, drainage, and water to industrial units. The Tribunal emphasized that the ultimate control of the assessee was with the government, and its accounts were subject to government audit procedures, indicating no profit motive. This classification of receipts as non-commercial was pivotal in granting the exemption.

4. Interpretation of 'General Public Utility' under Section 2(15):
The interpretation of 'General Public Utility' was crucial in this case. The Tribunal cited the Hon'ble Delhi High Court's decision in India Trade Promotion Organization vs. DGIT (Exemption) & Ors., which held that the dominant and prime objective of an institution should be examined to determine its charitable nature. If the primary objective was not profit-driven, the institution could still be considered charitable despite incidental commercial activities. The Tribunal also referred to other judicial decisions, reinforcing that the assessee's activities aimed at infrastructure development and maintenance were charitable in nature, falling within the scope of 'General Public Utility.'

Conclusion:
The Tribunal upheld the CIT(A)'s decision, affirming that the assessee's primary objective was charitable and not profit-driven. Consequently, the assessee was entitled to the benefits of Sections 11 and 12. The revenue's appeals were dismissed, and the assessee's cross-objections were deemed academic and not addressed in detail. The order was pronounced on 11th October 2021, dismissing all appeals and cross-objections.